Time To Reshape Cooperative Identity?

It's a new century -- is it time to reshape cooperative identity? The new millennium has dawned, and with it comes heightened clarity in our collective awareness of the importance of an old principle: cooperation among cooperatives. Number six of the prestigious "Seven Cooperative Principles," cooperation among cooperatives has heretofore been a lofty aspiration conjuring up warm and fuzzy feelings. Those heady days are fast dwindling. To thrive and, in many cases, to survive in our current economic context we have to do no less than incorporate this principle into our business model in a way that is both frightening and exciting.

Cooperation among cooperatives as a business model? What does that mean? How can it be achieved? What are the benefits? What do we have to give up in order to realize those benefits? Is it worth it?

In March of 1999, National Cooperative Bank convened an informal working group of natural food co-op leaders to discuss industry development priorities. Dubbed NCB's Natural Foods Advisory Committee, this group met again in June and October of 1999. The membership of the group included representation from various geographic regions, retail and wholesale interests, and consultants serving cooperatives.

Our purpose in forming the group was to better understand how co-ops can retain and grow their market share, and what NCB can do to support the achievement of such a goal. Together we explored the factors that are limiting the growth of cooperatives in an expanding industry. The Advisory Committee characterized the obstacles facing co-ops in terms of external and internal challenges.

Externally, co-ops experience competitive pressure from well-capitalized, for-profit chains that are putting downward pressure on our margins. What gives these competitors a market advantage? With the exception of private label, it is certainly not product. The external challenge can be expressed in two words: efficient infrastructure. This includes economies of scale in purchasing, branding, distribution, marketing and advertising. It also includes access to capital and resources for management training and retention and research and development. Simply put, our major competitors have the capacity to be big, and that gives them lots of advantages.

The internal challenge can also be expressed in a few words -- fear of growth (and we mean growth in its broadest sense). According to the Advisory Committee, co-ops face competitive disadvantages because of problems with individual accountability/ incentive systems, cumbersome decision-making and governance processes, insufficient rewards for talented leadership, aversion to "business, profit, and management." One person said simply, "The culture can drive out talent."

When co-ops are aggregated, we actually don't compare too badly to the chains. There are 350 of us with collective sales of approximately $500 million. As of the third calendar quarter of 1999, Whole Foods had 100 stores with projected 2000 annual sales of $1.5 billion. Wild Oats had 92 stores with sales projections of $1 billion for 2000. (see sidebar) What we currently lack is an ability to harness our collective power. That is why we believe cooperation among cooperatives has become a business imperative.

Imagine co-ops purchasing as one bloc when negotiating pricing with suppliers. Imagine all co-ops or groups of co-ops purchasing grocery bags, light fixtures, insurance, products for the shelves, point of sale systems, long-distance service together. The price improvements would be tremendous.

Imagine still further that the one co-op that had developed the best merchandising techniques in our sector rapidly disseminated that information to other co-ops so that they didn't have to try to learn it themselves. Imagine that most co-ops had their financial statements prepared by a central service and were able to either reduce their accounting staffs or divert their talents and energies to other projects. Imagine a Chief Information Officer for the co-op sector that kept us on the edge of the e-commerce and the information revolution.

Imagine that co-ops decided to invest (probably along with external investors) in the development of a best practice-based member equity model. This model, which would take into account state-by-state securities law, would enable co-ops to adopt member equity systems which would provide them with greater capitalization and opportunities for customers to link their purchases to support of their favorite causes (administered centrally by a co-op supported entity).

How is this for a wild idea: imagine that a couple of schematic designs were developed for new co-op stores. These designs would have enough flexibility to be adapted to sites of varying sizes, and cultures, but they would provide a co-op with a template for how to plan, construct, staff, and ultimately set their new stores.

Enticing or ruinous? We would argue the former. This is a vision of an efficient co-op sector with an infrastructure ade-quate to foster growth, development and innovation. As cooperatives we bring both strong advantages and disadvantages to the task of creating such a reality. On our side we have a tremendously potent tool that comes at a premium in this "over supplied" economy -- customer loyalty. We bring committed managers, longevity, and the ability to innovate on a shoestring.

Take the development of CDS's Comparative Cooperative Financial Statements (CoCoFiSt) program for example. This program is a powerful benchmarking tool that can help all participating cooperatives drive out costs and bring their operations up to a "best practice" standard. And consider the achievements of Twin Cities Natural Food Cooperatives' and CGAMidwest's CAP program, 15 store buyers collaborating to achieve great prices and promotional support programs. (See Cooperative Grocer, Jan.-Feb. 2000.)

As strong as these achievements make us, they will not take us far enough.

An identity crisis?

Co-ops, unlike the major natural foods chains, value smallness. We value the fact that we are NOT corporations, we are NOT chains, we are NOT motivated by profit, and we are NOT big, and yet this is what gives our competitors their advantages. This is a conundrum. Many of us fear growth because we believe that through growth we will lose our identity as co-ops. This results in a resistance to growth in the broadest sense of the word -- a resistance to change, to learning, to innovation. We must overcome this in order to survive -- in our staffs, management, membership, and at the board level. We must become learning organizations that reward outstanding leadership, take risks (calculated ones, but still risks), and change and adapt as our society changes.

Third Quarter 1999

Whole Foods

Wild Oats

Co-ops

Number of Stores

100

92

350

Projected Annual Sales (millions)

1,500

1,000

500

Compared to Same Quarter Last Year

Comparable Store Sales Growth

8.3%

4.0%

10.0%

Revenues less COGS and Occupancy Expense

34.8%

31.0%

32.4%

Operating Expenses

28.0%

26.1%

29.3%

Operating Income

6.8%

4.9%

3.1%

Share Price

down

up

Plans for new or acquired stores in next 12 months

29

22

?

- data compiled by Walden Swanson

Overcoming our smallness does not necessarily mean we have to give up our uniqueness, but it does require trade-offs. Those who have structured joint purchasing agreements with sister co-ops or through a CGA know that you have to compromise to make those deals work. You can't always get . . . you know how that song goes. Some might think that this flies in the face of another venerable Cooperative Principle: autonomy and independence. But does it really? The intent of this principle is freedom from outside influence over our board membership. Cooperation among cooperatives does not threaten this principle.

A "third" way

We need to resist defining ourselves as "not those other guys." We need to unpack what it is that people value about shopping at a co-op. Is it connectedness, accessibility, community, participation? Is it the fact that we are small? Is it our product selection? We need to get to know our customers (current and potential) better and re-define how co-ops fit into a changing world. Dan Foley, GM of The Wedge, who participates in our Natural Foods Advisory Council, said at our recent meeting, "we need to market ourselves as businesses -- ecological, ethical businesses, but nevertheless businesses." Using co-op market share trends as an indicator, it is abundantly clear that simply being a co-op is not enough to ensure our survival into the next few decades. We must learn to better serve our customers and potential customers. In order to offer our customers and members what they really value, we will have to confront difficult trade-offs. We may have to concede some autonomy to better serve our members. Is that possible? Can customers be better served by an organization that has ceded control of some aspects of its operations?

Customers will be better served if we can find ways to turn ideas for cooperation among cooperatives into real products and systems relatively quickly. This is hard for co-ops because we so value voice -- the ability to participate in the democratic process. However, we will have to become more sophisticated about when to exercise our democratic rights if we hope to respond to opportunities in time to get maximum benefit from them. This at a minimum will require greater professionalism on our boards and greater adoption of the policy governance model, to enable general managers to make strategic decisions to join other cooperatives in efficiency-enhancing projects.

Consider the example of a co-op brand private label. Are we willing to give up complete control of our product selection in order to be able to provide our customers with co-op owned private label products? One of the reasons we are losing market share is because there are things that our competitors provide that we do not, things that customers value. Is there a way for us to tackle some of those issues together, yet remain "ethical, ecological businesses?" Can we organize ourselves and develop a private label while the opportunity is promising, or will the process of cooperating delay us from responding to customer needs?

One thing is certain, none of us alone can realistically attempt to develop a broad private label, or any of the other cooperative projects we asked you to imagine. Alone, we don't have the purchasing power, the research and development resources, or even all the ideas. Let's face it, we need each other. We have to consolidate our market power. We can consolidate our power through outright legal consolidation, or through joint purchasing, cooperative marketing programs, CoCoFiSt, taking advantage of technology to communicate better, and working together through entities like the Cooperative Grocer Associations.

What is the Bank doing to support growth of co-ops?

As the national financial intermediary established to serve business and consumer cooperatives, National Cooperative Bank and NCB Development Corporation cannot thrive without a healthy, growing customer base. Our success is interwoven with yours.

Over the years, NCB and NCBDC have consistently supported industry development for food co-op. We did this because of our mission to support consumer cooperatives. While mission remains an important inducement, we now invest in industry development for strategic business reasons. Our current approach is to apply the discipline of venture capitalists to those investments. We are not unrealistic about the potential for venture capital returns, at least not at this point in time, but we do expect strategic, if not financial, return on our investment.

In 1999, we targeted our industry investments to the development of CoCoFiSt and NCGA because of their potential to help build national infrustructure. We invested $80,000 to further develop CoCoFiSt and byproducts such as CoCoBud, which produces a rolling, quarterly budget based on CoCoFiSt historical trends. CoCoFiSt shows tremendous potential as an effective knowledge development tool. It can help us create a learning culture through information sharing, improve our ability to analyze operational problems, and can leverage the strength of other co-ops to provide solutions. In short, it's a practical tool for facilitating cooperation among cooperatives.

The Cooperative Grocers Information Network, or CGIN, for which we provided start-up funding, demonstrates how the technology/information revolution makes cooperation among cooperatives possible in a way that wasn't before. No longer does each co-op have to develop its own employee policy manual, job descriptions, member newsletter articles, or deli recipes. CGIN is a source for all of these and more.

Another tool is NCGA. In 1999, we invested $25,000 to cover part of the start-up budget. In exchange, we requested and were granted an advisory role on the NCGA board. NCGA is responding rapidly to the desires of six regional CGAs to consolidate market share where possible. NCGA is one powerful vehicle through which to achieve greater cooperation among cooperatives. (See report, page 13.)

Our vision for the end state of the co-op sector is not necessarily to be "number one" in the natural food industry, though that has a certain appeal, or to be big for the sake of being big. The end goal is to preserve what we value and what we've all invested so much "sweat-equity" to create -- an economic structure that encourages equality and participation, products that support good health and a sustainable environment, and organizational cultures where the heart and soul of a community find expression. We cannot preserve our core values without altering our business model. The writing is on the wall. We need to cooperate on a national scale. We encourage all co-ops to think about trading off some individual control for the benefits of collective power. In the presence of doing so, our identities just may be reshaped for the better.